Originally published by Jim Chester.
What Liability Does A Party Have for Breach of Contract In a Pandemic?
As governments around the globe push out regulations to help stop the spread of illness in unprecedented ways, businesses and people alike feel the effects of the changes in a myriad of ways. In a chain reaction of unexpected events, breach of contract in a pandemic situation easily becomes a common occurrence with parties attempting to abide by government protocols for immediate action.
Business Not as Usual: Breach of Contract in a Pandemic
The United States is in the midst of an unprecedented lock down related to controlling the spread of the novel coronavirus that leads to the disease known as COVID-19. COVID-19 was originally discovered in the Wuhan region of China but has quickly spread around the world. As a result of this global pandemic, major events and professional sports leagues throughout the country have been canceled or postponed. Even once the worst of the pandemic subsides, the nation will be digging out from under the economic rubble for a long time. And, what happens when such unexpected events lead to breach of contract in a pandemic?
Some of the hardest hit companies are in the hospitality industry, as most of the scheduled conferences, proms, weddings, and conventions for several weeks are canceled. Restaurants have closed and had to lay off staff and refuse deliveries from vendors. Movie theaters with new releases sit dark and empty. And while hospitality struggles, there are vendors and purchasers in other industries that are having their businesses and supply chains interrupted because of the COVID-19 pandemic.
Liability for Breach of Contract in a Pandemic
In some of the instances I have mentioned, along with many others, the events and orders canceled constitute a breach of contract for which the terminating customer would be liable for damages. Of course, the terminating party likely believes their breach is excused because of the circumstances caused by the pandemic and must rely on contractual impossibility provisions or legal doctrines justifying nonperformance. However, for a number of reasons a terminating party faces challenges that make their chances of success uncertain.
The law is not clear about liabilities regarding breach of contract in a pandemic and often the four corners of a written contract, if any, will be a deciding factor for the ultimate responsibility between the parties. Determining whether a customer is liable, or is justified in terminating a contract, is not always simple. A lot will depend on the language in the contract between the parties, as well as the local jurisdiction’s interpretation and application of legal principles such as “force majeure” and “Act of God” which would justify breach of contract.
Act of God and Force Majeure: Deciding Factors for Liability in Breach of Contract During a Pandemic
Whether a customer in breach of contact by canceling a service, event, or order is legally liable will depend on whether the COVID-19 pandemic constitutes an act of God that justifies termination of the contract. This is essentially a two-part analysis: (1) is the current pandemic an “Act of God,” and, if so, (2) whether the situation has made performance of the contract impossible.
Force majeure is a legal principle that provides a contracting party with a legal excuse not to perform their contractual obligations due to circumstances beyond their control that render their performance impossible. Force majeure clauses in contracts often include specific examples of the types of circumstances that justify nonperformance, such as acts of God, acts of a government or other authority or statutory undertaking, industrial dispute, strike, fire, explosion, accident, power failure, flood, riot, war, rebellion, and blockages. Some provisions also specifically refer to epidemics or pandemics in relation to breach of contract situations. If disease or pandemic is not specifically listed in the force majeure clause of the contract, a breaching party might be able to rely on language referring to “acts of God”.
Additionally, in the absence of any force majeure language in the contact, courts may apply common law equitable principles allowing for justifiable nonperformance caused by acts of God, in a claim for breach of contract in a pandemic. Whether a global disease is considered an act of God, however, would depend on how such concept is interpreted by relevant legal authority in the particular jurisdiction.
Typically, To Justify Breach of Contract Even in a Pandemic, Performance Must be Impossible
Assuming “pandemic” is listed in the force majeure clause or that COVID-19 is otherwise determined to be an act of God, a breaching party must then show specific impact of the pandemic that made performance impossible. Under Texas law, to relieve one of liability because the event causing a breach is an act of God, it must appear that such act of God was the sole proximate cause of the injury.
However, the pandemic, itself, might not be the actual cause of nonperformance. Instead, the effect of the pandemic – fear – might cause nonperformance, or it might merely make performance inconvenient or impracticable. As such, a breaching party may not be protected if “fear of contracting illness” is not listed in contract as a force majeure event unless some other intervening factor, such as a government lockdown occurs, making the performance impossible and leading to a forced, unpreventable breach of contract.
For example, if a company were to cancel an upcoming conference at a hotel venue due to a significantly lower number of registrations caused by fears about the pandemic, their performance of the contract might not be considered impossible and, as such, they would be liable for breach of contact. However, if the government in the state or city in which the venue is located banned gatherings of more than 10 people, as many have done in response to the COVID-19 pandemic, performance of a conference event would become impossible.
Pandemic and Breach of Contract: Challenges to Justifiable Non-Performance
Since excusable non-performance would be a defense to a breach of contract claim, the breaching party would have the burden of proof in asserting impossibility. The defendant’s claims would be narrowly construed and would be a question of fact for the jury. Thus, a defendant seeking to avoid damages for breach of contract in a pandemic situation, claiming fault on the pandemic itself, will face some significant challenges.
Takeaways From Breach of Contract in a Pandemic Situation
Although the impact of the COVID-19 pandemic will be felt for some time, as companies assess damages and assign blame, it is likely that many will look to recover some of their costs from customers who breached contracts. A terminating party’s liability will depend on:
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the specific circumstances of the nonperformance;
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the language of the force majeure clause in the contract, if any;
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whether a pandemic is considered an act of God; and
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the legal authority of the jurisdiction.
Regardless of the outcome of any specific cases, the COVD-19 pandemic will likely force many companies to revisit the language in their force majeure clauses in future contracts.
corporate & commercial
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